Familiarity is assumed with the stipulated and conceded facts in these cases, which will not be recited except to the extent necessary for an understanding of the issues presented. Familiarity is also assumed with the prior litigation tried before the late Judge Bryan, Banco Nacional de Cuba v. First National City Bank,270 F.Supp. 1004 (S.D.N.Y.1967), rev’d.442 F.2d 530 (2d Cir. 1971), rev’d.406 U.S. 759, 92 S.Ct. 1808, 32 L.Ed.2d 466, reh. denied 409 U.S. 897, 93 S.Ct. 92, 34 L.Ed.2d 155 (1972); on remand478 F.2d 191 (2d Cir. 1973) (hereinafter “Banco I”). Plaintiffs have reserved their right to relitigate on subsequent appeal the legal points determined in the Banco I case, but their counsel concedes that for purposes of proceedings in this district court, those issues are precluded by the plurality opinions of the Supreme Court in 406 U.S. 759, 92 S.Ct. 1808, 32 L.Ed.2d 466 et seq. and the determination on remand in 478 F.2d 191. For additional discussion of these issues, see Banco Nacional de Cuba v. Sabbatino,193 F.Supp. 375 (S.D.N.Y.1961), aff’d.307 F.2d 845 (2d Cir. 1962), rev’d.376 U.S. 398, 84 S.Ct. 923,
|[ 505 F.Supp. 419 ]|
11 L.Ed.2d 804 (1964); on remand, sub nom. Banco Nacional de Cuba v. Farr,243 F.Supp. 957 and 272 F.Supp. 836 (S.D.N.Y.1965), aff’d.383 F.2d 166 (2d Cir. 1967), cert. denied 390 U.S. 956, 88 S.Ct. 1038, 20 L.Ed.2d 1151, reh. denied 390 U.S. 1037, 88 S.Ct. 1406, 20 L.Ed.2d 298 (1968), and also the legislative history leading to the enactment of the so-called “Hickenlooper” or “Sabbatino” Amendment, now 22 U.S.C. § 2370(e)(2), passed by Congress to frustrate in part the apparent or perceived rule of the Supreme Court in the Sabbatino case.
By various statutes and decrees, ownership and control of the properties and businesses of those who fled Cuba following the revolution became vested in the Cuban Government. On May 17, 1959 an “agrarian reform law” was enacted, looking towards nationalization and dismemberment of large land holdings in a nation which had previously founded its economy largely on the production of sugar for export. This agrarian reform was administered by an arm of the Cuban Government known as INRA (El Institutio Nacional de Reforma Agraria), which proceeded to act in the nature of a state-owned trading corporation, owning the sugar production facilities and disposing of the export sugar crop.
|[ 505 F.Supp. 420 ]|
Persons or entities called “interventors” were appointed by the Cuban Government to confiscate and conduct numerous business enterprises owned by absentees, native and foreign.
|[ 505 F.Supp. 421 ]|
One-half of the stock of Banco Nacional had been subscribed for and issued to the Government of the Republic of Cuba. Prior to the Cuban Revolution of 1959, the remaining half had been issued to subscribing private banks, which were required to participate. Its president and three out of five directors were appointed by the Republic. The Government shared in the profits of the Bank after the payment of dividends to its shareholders and appropriations to reserves. Banco Nacional had the sole power to issue currency in the Republic of Cuba, such currency being regarded as an obligation of the Cuban state. It set maximum interest rates for private banks, acted as fiscal agent and economic advisor to the Government, and as agent for the Currency Stabilization Fund created simultaneously and by the same Law No. 13 of 1948.
Pursuant to Article 24’s provision for the expropriation of property, Law No. 851 was enacted on July 6, 1960. This conferred full authority upon the President and the Prime Minister of the new government to nationalize, through forced expropriation, property held by United States nationals. The President and the Prime Minister were given
|[ 505 F.Supp. 422 ]|
the power to appoint persons or agencies necessary to administer the nationalized properties, and the appraisers to determine the value of the properties. Law No. 851 provided for payment to be made, based on the appraised value, for the property expropriated.
Law No. 891 by Article I declared the banking function public, to be carried only by the State, through the organs created for that purpose. By Article III of that Law it was ordered that the nationalization and subsequent adjudication to the Cuban State ordered in the preceding Article be effected through Banco Nacional de Cuba as the autonomous body charged with moving the banking function of the State. Banco Nacional was declared to be the legal successor, subrogated in the place and stead of a natural or juridical person engaged as a banker, and it was legislated that upon the “consequent taking over of Banco Nacional de Cuba of the assets and liabilities of the juridical persons or companies affected by this law” they were declared dissolved and extinguished. Article V of the Law provided that the partners or stockholders of the juridical persons or companies dissolved or extinguished were entitled to the right of indemnity resulting from the appropriations ordered, and that payment will be made by liquidating the corporate credits or shares as well as the dividends or profits earned up to the effective date of this Law “according to the system of appraisal selected
|[ 505 F.Supp. 423 ]|
by the President of the Bank” (Banco Nacional de Cuba) at the close of operations December 31, 1960. Additional provisions are set forth requiring the issuance of bonds for part of the amounts due. The statute provided that Banco Nacional “shall assume liability for the deposits existing in the banks” affected by the Law, and shall “guarantee the owners thereof as to the normal handling of the operations related thereto.”
As a result of the Agrarian Reform Act of May 17, 1959, INRA had become the owner of a cargo of animal feed sugar sold by Bancec pursuant to contract for delivery into the United States. The contract was supported by an irrevocable letter of credit in the favor of Bancec, issued in New York
|[ 505 F.Supp. 424 ]|
on August 18, 1960 by Citibank in the amount of $650,000 U. S. funds payable at sight on readiness to discharge in a U. S. port. On that date, Citibank was operating its branches in Cuba. The “intervention” of its branches and those of Chase, discussed herein, did not take place until September 17, 1960.
By motion docketed in this litigation on May 2, 1975, plaintiff moved for an order pursuant to Rule 25, F.R.Civ.P., substituting Empresa Cubana Exportadora de Azucar y sus Derivados (Cuba Zucar) as the plaintiff herein. In opposition to that motion defendant argued that despite the provisions of the various laws and resolutions having to do with the devolution of the claim, which Citibank regarded as self-serving, the subsequent agencies could not be insulated from the counter-claims of defendant against the Cuban Government, and that none of the subsequent agencies could take any more or obtain any better title than its predecessors, the Ministry of Foreign Trade of the Republic of Cuba, or Bancec. As background for the May 2, 1975 motion, the parties had previously stipulated that the Republic of Cuba itself should be substituted as a plaintiff, and should serve an amended complaint. A stipulation to that effect was marked “SO ORDERED” on July 6, 1961. This stipulation, docketed July 7, 1961, authorized the “supplemental complaint in the form annexed,” but no such supplemental complaint
|[ 505 F.Supp. 425 ]|
was apparently annexed or submitted to the Court. No such amended complaint was ever served and filed, and no formal substitution of the Republic of Cuba took place.
|[ 505 F.Supp. 426 ]|
This section, adopted in 1929, was declaratory of prior New York law, at least as to the point under consideration. McBride v. The Farmers Bank of Salem, Ohio, 26 N.Y. 450, 454 (1863) and prior New York cases cited therein, reached this result on reasoning that the collecting bank was not a bona fide holder in due course for value, because antecedent debt is not such a consideration. On this actual point hung the dispute between New York State courts and the Supreme Court following the decision in Swift v. Tyson, 41 U.S. (16 Pet.) 1, 10 L.Ed. 865 (1842) overruled in Erie R. R. v. Tompkins,304 U.S. 64, 58 S.Ct. 817, 82 L.Ed. 1188 (1938). Compare, The Bank of the Metropolis v. The New England Bank, 42 U.S. (1 How.) 234, 11 L.Ed. 115 (1843) permitting set-off by a collecting bank as sought herein. In a pre-Erie case, Carnegie Trust Co. v. First Nat. Bank of the City of New York, 213 N.Y. 301, 304 (1915) the New York Court of Appeals (per Cardozo, J.) assumed, but found it unnecessary to hold, that a collecting bank had the right before it made remittance to apply the collections against its deposit with the plaintiff bank of deposit. The Court suggested that the issue would turn on “the relation between the [collecting] bank and the plaintiff,” which it characterized as “obscure.” The Court noted that if the bank held the drafts for collection only, as trustee or agent for the depositor, “the rules of equitable set-off do not permit a trustee or agent to apply a claim in his own right in cancellation of his liability as a fiduciary,” citing Morris v. Windsor Trust Co., 213 N.Y. 27, 106 N.E. 753 (1914).
“The term `unconditional credit,’ although frequently recurring, is nowhere defined throughout article 19-A of the Negotiable Instruments Law (section 350, et seq.). That article, commonly known as the Bank Collection Code, in many respects has revolutionized the ancient principles pertaining to the collection of
|[ 505 F.Supp. 427 ]|
commercial paper by banks. … Construing together all the provisions of that article, the term `unconditional credit’ can only mean a credit which may not be withdrawn, even if it is eventually found that the item for which it is given is not collectible. It imports a credit which is not `revocable’ under section 350-a, nor `provisional’ under section 350-b.”
Also of slight weight are reported cases in American courts decided before January 21, 1977 involving agencies and instrumentalities of foreign countries, most of which have been resolved factually according to the degree of independence of the corporate entity. United States v. Deutsches Kalisyndikak Gesellschaft,31 F.2d 199 (S.D.N.Y. 1929); Coale v. Societe Co-Operative Suisse Des Charbons, Basle,21 F.2d 180 (S.D.N.Y. 1921); Ulen & Co. v. Bank Gospodarstwa Krajowego, 261 App.Div. 1, 24 N.Y.S.2d 201 (1940). Also inapposite are cases in which private corporations were continued to be treated as such, notwithstanding acquisition by government of stock ownership of those corporations. See, e. g., Bank of the United
|[ 505 F.Supp. 428 ]|
States v. Planters’ Bank of Georgia,22 U.S. 904, 9 Wheat. 904, 6 L.Ed. 244 (1824); Ballaine v. Alaska Northern Ry. Co., 259 F. 183 (9th Cir. 1919); Panama R. Co. v. Curran, 256 F. 768 (5th Cir. 1919).
With respect to all of their claims, Chase and Citibank each recognize that they cannot proceed affirmatively against plaintiffs in this action, or the Government of Cuba,
|[ 505 F.Supp. 429 ]|
but are at most entitled to a full set-off. See National City Bank v. Republic of China,348 U.S. 356, 75 S.Ct. 423, 99 L.Ed. 389 (1955); 28 U.S.C. § 1607(c).
In connection with our discussion of Act of State, it must be observed that Chase
|[ 505 F.Supp. 430 ]|
and Citibank each have a “Bernstein letter” from the Office of the Secretary of State of the United States. Bernstein v. N. V. Nederlandsche,210 F.2d 375 (2d Cir. 1954). The 5-4 decision of the Supreme Court at 406 U.S. 759, 92 S.Ct. 1808, 32 L.Ed.2d 466 (1972) in Banco I must be read to hold that the Act of State doctrine does not bar consideration of Citibank’s off-set up to the amount of Banco Nacional’s claim against Citibank. That conclusion applies with equal vigor to Chase’s offsets here pleaded.
|[ 505 F.Supp. 431 ]|
“The Cuban nationalizations `based upon a totally illusory funding system and payable in bonds that were never printed’ so patently violated international law that serious analysis was unnecessary.”
“There are few if any issues in international law today on which opinion seems to be so divided as the limitations on a state’s power to expropriate the property of aliens.26 [26. Compare, e. g., Friedman, Expropriation in International Law 206-211 (1953); Dawson and Weston, “Prompt, Adequate and Effective”: A Universal Standard of Compensation? 30 Fordham L.Rev. 727 (1962), with Note from Secretary of State Hull to Mexican Ambassador, August 22, 1938, V Foreign Relations of the United States 685 (1938); Doman, Postwar Nationalization of Foreign Property in Europe, 48 Col.L.Rev. 1125, 1127 (1948). We do not, of course, mean to say that there is no international standard in this area; we conclude only that the matter is not meet for adjudication by domestic tribunals.] There is, of course, authority, in international judicial27 [27. See Oscar Chinn Case, P.C.I.J., ser. A/B, No. 63, at 87 (1934); Chorzow Factory Case, P.C.I.J., ser. A., No. 17, at 46, 47 (1928).] and arbitral28 [28. See, e. g., Norwegian Shipowners’ Case (Norway/United States) (Perm.Ct.Arb.) (1922), 1 U.N.Rep. Int’l Arb. Awards 307, 334, 339 (1948), Hague Court Reports, 2d Series, 39, 69, 74 (1932); Marguerite de Joly de Sabla, American and Panamanian General Claims Arbitration 379, 447, 6 U.N.Rep. Int’l Arb. Awards 358, 366 (1955)] decisions, in the expressions of national governments,29 [29. See, e. g., Dispatch from Lord Palmerston to British Envoy at Athens, Aug. 7, 1846, 39 British and Foreign State Papers 1849-1850, 431-432. Note from Secretary of State Hull to Mexican Ambassador, July 21, 1938, V Foreign Relations of the United States 674 (1938); Note to the Cuban Government, July 16, 1960, 43 Dept. State Bull. 171 (1960)] and among commentators30 [30. See, e. g., McNair, The Seizure of Property and Enterprises in Indonesia; 6 Netherlands Int’l L.Rev. 218, 243-253 (1959); Restatement, Foreign Relations Law of the United States (Proposed Official Draft 1962), §§ 190-195.] for the view that a taking is improper under international law if it is not for a public purpose, is discriminatory, or is without provision for prompt, adequate, and effective compensation. However, Communist countries, although they have in fact provided a degree of compensation after diplomatic efforts, commonly recognize no obligation on the part of the taking country.31 [31. See Doman, supra, note 26, at 1143-1158; Fleming, States, Contracts and Progress, 62-63 (1960); Bystricky, Notes on Certain International Legal Problems Relating to Socialist Nationalisation, in International Assn. of Democratic Lawyers, Proceedings of the Commission on Private International Law, Sixth Congress (1956), 15.] Certain representatives of the newly independent and underdeveloped countries have questioned whether rules of state responsibility toward aliens can bind nations that have not consented to them32[32. See Anand, Role of the “New” Asian-African Countries in the Present International Legal Order, 56 Am.J. Int’l L. 383 (1962); Roy, Is the Law of Responsibility of States for Injuries to Aliens a Part of Universal International Law? 55 Am.J. Int’l L. 863 (1961).] and it is argued that the traditionally articulated standards governing expropriation of property reflect `imperialist’ interests and are inappropriate to the circumstances of emergent
|[ 505 F.Supp. 432 ]|
states.33 [33. See 1957 Yb.U.N. Int’l L.Comm’n (Vol. 1) 155, 158 (statements of Mr. Padilla Nervo (Mexico) and Mr. Pal (India)).]
It must be noted first that the percentage of claims to be recovered is usually not known at the time that the lump-sum settlement is fixed. The lump-sum settlement is the product of diplomatic bargaining, and the allocation of that lump-sum settlement is usually determined by a Commission in the receiving country. The paying country
|[ 505 F.Supp. 433 ]|
could not care less how the lump-sum settlement is allocated, and indeed, when the lump-sum settlement is agreed to, does not know with any finality what the receiving country will compute to be the total value of the expropriated property. The valuation of the expropriated property is no longer of concern to the paying country, if, indeed, it ever was. The percentage of claims satisfied is therefore fortuitous, and of no significance because it is affected by two unknowns: the relative bargaining power of the parties, and the unpredictible outcome of subsequent administrative proceedings to allocate the lump-sum payment among the recipients. True, it is very rare that 100% is recovered. This is because there would be no advantage to the expropriating nation to agree voluntarily to a lump-sum payment which would discharge all of the claims. Were it willing to do so, its ability to negotiate separately with the claimants or grant them access to its own courts, would probably bring in most of the claims at a lower value.
American decisional law is reflective of our nation’s public policy. However, the courts are not the only institutions declaring public policy. Of more than passing interest is the declaration of Congress found in the legislative history to the “Rule of Law Amendment,” § 301(d)(4) of Public Law 88-633, 78 Stat. 1013, adopted as an amendment to the Foreign Assistance Act of 1964 and found in 22 U.S.C. § 2370(e)(2), as extended, amended and presently in effect. This enactment is also called the “Hickenlooper Amendment” in memory of the late Senator Bourke Hickenlooper, its author, and is sometimes also referred to in
|[ 505 F.Supp. 434 ]|
the literature as the “Sabbatino Amendment” because it intended to reverse the presumption in Sabbatino.
In considering the violation of international law found in these cases, and the requirement for just, speedy and adequate compensation in convertible funds, which this Court finds to be international law as interpreted by American courts and the Congress of the United States, we should not become lost in revolutionary rhetoric. This is not a case where all private properties were expropriated at once, both from aliens and citizens, because a nation wished to experiment with socialist economic theory. Even the agrarian land reform plan in Cuba did not expropriate allthe farms. Those which were more productive than a statutory standard were allowed to remain in private ownership and those below a certain size (1,005 acres) were also allowed to remain in private ownership. It is part of the law of nations that aliens of a
|[ 505 F.Supp. 435 ]|
nation at peace with the host nation who are allowed to enter for the purpose of trade, bringing their goods, capital and lives under the protection of the host country, should not for purposes of such rights, be treated worse thereafter than a national of the host country would be treated.
This Court regards the matter as being not free from doubt, and worthy of consideration on an appellate level. But, the assigned judge having expressed himself to the effect that the motions to dismiss “have been granted,” renders unnecessary any independent decision at this time by the writer. The rationale of Judge Bryan’s conclusion as disclosed in his notes, was to the
|[ 505 F.Supp. 436 ]|
effect that “Chase may not interpose counterclaims asserted in its fiduciary capacity as Railroad Equipment Trustee in an action brought against Chase in its individual corporate capacity.” Judge Bryan regarded Rule 13(b), F.R.Civ.P. as a provision which “does not open the door to counterclaims by one who is not a party to the suit and against whom the plaintiff makes no claim.” His bench notes, previously referred to as a “draft opinion” observe:
“Chase argues that a trustee has a right to sue on a trust claim without joining his cestuis qui trustent and in so doing sues in his individual rather than in his representative capacity, citing Thompson v. Whitmarsh, 100 N.Y. 35, 2 N.E. 273 (1885); Toronto General Trust Company v. Chicago, Burlington & Quincy Railroad Company, 123 N.Y. 37, 25 N.E. 198 (1890), and other cases for this proposition, maintaining that New York law is applicable because under Fed.R.Civ.P. 17(b) a party’s `capacity’ is governed by local law. The conflicts of law rules governing interpretation of the word `capacity’ in rule 17(b) are inapplicable to the opposing party doctrine of rule 13(b). See Tolson v. Hodge,411 F.2d 123 (4th Cir. 1969). Under Hanna v. Plumer,380 U.S. 460, 85 S.Ct. 1136, 14 L.Ed.2d 8 (1965), federal law governs this issue. From this Chase concludes that it is asserting the third and fourth counterclaims in its individual capacity and therefore it is the party opposing Banco Nacional. I cannot accept this conclusion. The cases cited by
|[ 505 F.Supp. 437 ]|
|[ 505 F.Supp. 438 ]|
Y. v. Republic of China,348 U.S. 356, 75 S.Ct. 423, 99 L.Ed. 389 (1955), does not support that position. The Republic of China case merely held that a foreign sovereign who sues in our courts waives immunity on counterclaims [based on the subject matter of a sovereign’s suit Id., 364, 75 S.Ct. at 428]. It does not waive rights that any individual litigant in our courts would otherwise have, including the right to object to the assertion against it of a counterclaim in violation of the opposing party doctrine. It simply waives to a limited extent its right to object to a counterclaim on the ground of sovereign immunity.
Since Judge Bryan did not finally complete his work in this matter, we believe further discussion of the point might be of assistance to the parties and the Court of Appeals. The reform movement in rules of pleading and practice killed off much of the niceties in issues affecting capacity by which the 19th century bar was bemused. Thereby, the issue of what counterclaims or set-offs could be pleaded lost much of its vigor and interest. This is essentially a diversity case, to which New York substantive
|[ 505 F.Supp. 439 ]|
law should be applicable, and, if outcome determinative, New York adjective law likewise. Guaranty Trust Co. v. York,326 U.S. 99, 65 S.Ct. 1464, 89 L.Ed. 2079 (1945). In most domestic litigation it is of no serious importance if a counterclaim or set-off cannot be asserted, because the party who is prevented by some nicety of pleading or practice rules from asserting his counterclaim or set-off can usually bring a plenary action in his differing capacity, and indeed at least prior to Schaffer v. Heitner,433 U.S. 186, 97 S.Ct. 2569, 53 L.Ed.2d 683 (1977), such a party defendant could, under the rubric of Harris v. Balk,198 U.S. 215, 25 S.Ct. 625, 49 L.Ed. 1023 (1905) attach the plaintiff’s very claim, in the jurisdiction in which plaintiff was litigating, and gain quasi in rem jurisdiction to the extent of that claim, in that district, to support a plenary action. The actions could usually be consolidated for trial, and the whole issue thrashed out together even if pleading niceties prevented a counterclaim or set-off being pleaded because of differing capacities. So the problem seldom arose. Such practical resolution of counterclaims held in a different capacity is not open to Chase in this case because with limitations not here relevant, Banco Nacional is immune, as an instrumentality of the Cuban Government, from suit in this District or in the state courts, except to the extent that a set-off can be pleaded as an affirmative defense. Because of the ready availability of a plenary lawsuit in lieu of the counterclaim which would have been permitted but for the difference in capacity, the likelihood that an issue of mutuality of set-off would be litigated today in this jurisdiction under any other circumstances is remote.
|[ 505 F.Supp. 440 ]|
Another issue presented with respect to Chase’s trustee claims is whether the law of New York applies or whether the right to assert a set-off or plead a counterclaim in a diversity case should be controlled by federal procedural rules. Rule 17(b), F.R.Civ.P. requires that the capacity of a person to maintain a suit in a representative or fiduciary capacity must be “determined by the law of the state in which the district court is held.” See Cooper v. American Airlines,149 F.2d 355 (2d Cir. 1945). This suggests that Chase’s right to assert the counterclaim in its capacity as trustee depends on applicable New York law. Probably the law of New York, as indicated above, does not permit a person to assert claims that he holds as a fiduciary as an off-set against claims directed at him in his personal capacity. However, Rules 13(a) and (b), F.R. Civ.P. do not appear on their face to restrict the setting up of a counterclaim or off-set by a defendant simply because the counterclaim or off-set belongs to him in a different capacity. Generally, under the doctrine of Hanna v. Plumer, supra, once the district court determines that it has jurisdiction over the parties, and that the parties have capacity to sue and be sued, the Federal Rules of Civil Procedure should be applied to procedural matters. Tolson v. Hodge,411 F.2d 123 (4th Cir. 1979); Avondale Shipyards, Inc. v. Propulsion Systems, Inc., 53 F.R.D. 341 (E.D.La.1971); G & M Tire Co. Inc. v. Dunlop Tire & Rubber Co., 36 F.R.D. 440 (N.D.Miss.1964). Despite its general language, the facts in Tolson do not involve the assertion by a fiduciary of claims held in such capacity to reduce the fiduciary’s own personal liability to the opposing party. In Tolson plaintiff sued an administratrix who counterclaimed in her fiduciary capacity only. In the case of Chase, there is probably not the same logical relationship between defendant’s claim as trustee against plaintiff and plaintiff’s claim against defendant in its own corporate capacity such as Rule 13(a) would require to be pleaded as a set-off to reduce the trustee’s own personal liability. In this case, defendant’s set-off claims arose out of the same general occurrence as the claims asserted by plaintiff, that is to say, the Cuban Revolution, but the defendant’s set-off claims here to not bear the logical relationship to the plaintiff’s claims such as to make the set-offs compulsory under Rule 13(a). See Harris v. Steinem,571 F.2d 119 (2d Cir. 1978).
When we focus on the question of trustee identity, evolution of the law concerning trusts has left an unclear result. At common law, a trustee held legal title to the trust property in his own name and could sue in his own name for an injury to the trust property. Toronto General Trust Co. v. Chicago, Burlington & Quincy Railroad Co., 123 N.Y. 37, 25 N.E. 198 (1890). A single person acting as trustee of two trusts could not litigate against himself at common law, but would have to resolve any such dispute either by resigning and permitting a successor trustee to litigate, or by resort to equity. In United States Trust Company of New York v. Bingham,301 N.Y. 1, 92 N.E.2d 39 (1950) the lower courts had allowed a trust company to appear in a proceeding for the judicial settlement of
|[ 505 F.Supp. 441 ]|
fiduciary accounts of its sole trusteeship of the Payne trusts, against which the Estate of one Ledyard, of which the same fiduciary was executor, had a claim for trustee commissions earned by Ledyard during his lifetime, and to litigate that issue against itself. Distinguishing Fisher v. Banta, 66 N.Y. 468 (1876), which held that the administrator of an estate cannot account to himself as executor of a deceased beneficiary of the same estate, the New York Court of Appeals affirmed. In Bingham the Trust Company was represented in its separate capacities by two different attorneys. The dissenting opinion of Judge Desmond states the case simply:
|[ 505 F.Supp. 442 ]|
This is a logical conclusion and one with which I am in accord and, in consequence, I am unable to see that the same person, by the addition of a designation, can thus overcome the prohibition which otherwise exists. In other words, a person, by acting as executor or trustee, does not thereby become a separate entity like a corporation; he continues to be, and is, the same natural person as he is in his individual capacity.” (Emphasis added).
The Cuban branches were not separately incorporated. By reason of American law, neither Chase nor Citibank could have owned and operated its Cuban branches as
|[ 505 F.Supp. 443 ]|
subsidiary corporations organized under Cuban or American law. See 12 U.S.C. § 601. Nor could these national banks have placed at risk in Cuba all of their general assets wheresoever located. Id. On the books of the home office the branches were treated collectively as a separate enterprise from the domestic banking operations. The books of account showed the total capital invested in or allocated to the Cuban operations, and a daily balance was struck showing “indebtedness” between the Cuban operation and the bank as a whole, as if the Cuban operation were a separate enterprise. This was in accordance with customary foreign banking operations of American banks.
Prior to the enactment of Law No. 13 of 1948, which established Banco Nacional, there was little statutory regulation of the banking business in Cuba. The commercial code required maintenance of a minimum legal cash reserve of 25% of deposit liabilities. For purposes of enforcing this code, the only liabilities considered were those of the Cuban branches, not of the entire bank. As noted above, when required to subscribe to Banco Nacional stock in proportion to
|[ 505 F.Supp. 444 ]|
their shares of the deposits of all banks in Cuba, Chase and Citibank did so solely with reference to deposits in their Cuban branches. Just prior to confiscation, and at all prior times, Banco Nacional had recognized the obligations of the Cuban branches to repay to the head office such items as profits, overdrafts and amounts due with respect to letters of credit which the branches had caused the head office to open in New York in favor of Cuban businesses. Cuba had permitted remission of such amounts to New York along with other similar transactions except that the last two years profits were not remitted because of restrictions placed on foreign exchange.
“The eely character of the word `value.’ It is a bewitching word which, for years,
|[ 505 F.Supp. 445 ]|
has disturbed mental peace and caused numerous useless debates. Perhaps it would be better for the peace of man’s mind if the word were abolished. Reams of good paper and gallons of good ink have been wasted by those who have tried to give a constant and precise meaning. The truth is that it has different meanings in different contexts ….” 125 F.2d at 946.
The applicable value will be that which our own Government would pay to a domestic corporation under our laws of eminent domain. This basic standard of valuation is market value, “what a willing buyer would pay in cash to a willing seller.” United States v. Miller,317 U.S. 369, 374, 63 S.Ct. 276, 280, 87 L.Ed. 336 (1943). That there are no willing buyers around, or that the property taken is not of a sort which is fungible or generally bought and sold, does
|[ 505 F.Supp. 446 ]|
not detract from the validity of the theory nor prevent its application.
There are numerous authorities to the effect that the prior depressing effect of the threat of nationalization by the nationalizing country are to be disregarded in fixing value of expropriated property. Authorities include the Case Concerning the Factory at Chorzow, P.C.I.J. Ser. A No. 17 at 47; Restatement (Second) of the Foreign Relations Law of the United States § 188 Comment b (1965); Lillich, “The Valuation of Nationalized Property by the Foreign Claims Settlement Commission” in Lillich I, pp. 95 and 97, n. 13; Almota Farmer’s Elevator and Warehouse Company v. United States,409 U.S. 470, 478, 93 S.Ct. 791, 796, 35 L.Ed.2d 1 (1973). The decisions of the Foreign Claims Settlement Commission accept this argument by using earnings figures from the pre-revolutionary period in Cuba. See, e. g., Claim of First National City Bank,proposed Decision No. CU 3835
|[ 505 F.Supp. 447 ]|
(September 3, 1969). Claim of Intercontinental Hotels Corporation, Decision No. CU-4545 (April 13, 1970).
Defendants, by asking the Court to disregard totally the depressing effect on their business of the events of 1959-60, seek compensation in part for the business losses they incurred as a result of those events. Defendants are entitled to compensation only if and to the extent that the events which led to those losses were actions of the Cuban Government in violation of international
|[ 505 F.Supp. 448 ]|
law, typically including confiscation, and the chilling of the value of the asset prior to seizure which occurred when confiscation became a foreseeable certainty. There does not appear to be a legal basis to award compensation to defendants for that portion of their losses in the value of their businesses resulting solely from secular change in Cuba.
Ordinarily the New York courts award pre-judgment interest on money from the time when the money becomes due and payable. Expressed differently, interest is said to be an invariable legal incident of the principal debt only whenever a debtor knows precisely what he is to pay and when he is to pay, but does not. Gray v. Prudential Insurance Co., 46 N.Y.S.2d 850 (Sup.Ct.N.Y.Co.1943), rev’d. on other grounds,267 A.D. 688, 48 N.Y.S.2d 82 (1st Dept. 1944). There is an exception of long standing to the award of pre-judgment interest by way of damages for the detention of a debt. Whenever the law prohibits payment of the principal, interest during the existence of the prohibition is not demandable.
|[ 505 F.Supp. 449 ]|
See Wheelock v. Tanner, 39 N.Y. 481, 504 (1868); Moscow Fire Insurance Co. v. Heckscher & Gottlieb, 260 A.D. 646, 648, 23 N.Y.S.2d 424 (1st Dept. 1940), aff’d. 285 N.Y. 674, 34 N.E.2d 377 (1941). An analogous New York statute, § 100-b(4) of the Banking Law, provides that a trust company is not required to allow interest upon uninvested funds held by it as a fiduciary where payment of the principal is prohibited under any order, regulation or ruling issued under or pursuant to the Trading With the Enemy Act.
When read together as a part of the total statutory scheme, as they must be, these provisions are considered merely to prevent judicial tinkering with the total amount of loss certified by the Commission with respect to any claimant. That is to say the Commission’s determination of the amount of a claimant’s loss, made after hearing claimant but without giving the foreign nation an opportunity to be heard or present evidence, is final for purposes of distributing any money ultimately received from a foreign government in lump-sum negotiated diplomatic settlements of the total claims of American nationals for property taken, and/or as a result of our Government having blocked the foreign funds located here. The reason for such a provision is obvious. The lump-sum payment of indemnification
|[ 505 F.Supp. 450 ]|
will be distributed pro rata among claimants in accordance with the amounts of their claims. Challenge by one claimant to the total dollar amount fixed for his claim would delay distribution of the settlement funds to all claimants, since ordinarily no distribution can be made until the total amount of outstanding claims has been adjudicated by the Foreign Claims Settlement Commission, so the percentage of recovery by all claimants can be determined. See, 95 Cong.Rec. 8854 (1949), which sets forth the Senate debate on 22 U.S.C. § 1623(h) as follows:
For 10 long years, since I have been a Member of this House, we have heard a great deal of defense of the administrative agencies and commissions, that they should be given the right to make final decisions, so as to secure rapidity and flexibility. But we wiped that all out with the Logan-Walter law. We said, under the Act of Administrative Procedure, that these various boards and bureaus are going to be subject to review by the courts of the land. A man is not going to have to take the last word of some administrative bureaucrat. He is not going to have to know the right people in the Department. He is not going to be of the right political party or hire the right lawyer. He is going to have a chance to go into court if he disagrees, and an independent judiciary is going to decide what his rights are. But now, in this strange, anomalous thing that is brought here we are going to go back on the Logan-Walter law and say, `Oh, no, no. All other boards, bureaus, and agencies around here must have some kind of court review, but not the State Department.’
|[ 505 F.Supp. 451 ]|
The fact that such review is possible has had a very beneficial effect on those agencies that exercise quasi-judicial functions. But when it comes to American nationals making a claim against their own Government for money which their Government has collected on their behalf from another country, you say, `Oh, no. Your appeal is to the `guys’ who made the decision.’ These three bureaucrats. `If you do not like it, you can lump it.’
Chase’s four Cuban branches were treated for bookkeeping purposes and convenience as a single so-called “Havana Branch” and will be referred to herein on occasion as a single branch. Chase has presented two separate theories, separately pleaded as separate counterclaims with respect to the confiscation of its Havana Branch. The first is referred to as the “separate entity” or “contract theory” of damages, and is based on the contention that the Havana Branch should be treated as a separate entity in the nature of a subsidiary corporation, whose relationship with the parent, defendant here, is that of debtor-creditor. Chase claims that the Havana Branch was indebted to its home office
|[ 505 F.Supp. 452 ]|
at the time of taking in the amount of $5,780,228, and that by virtue of Cuban law, specifically Resolution 2 of September 17, 1960, when plaintiff confiscated the branch, it assumed all the debts of the Havana Branch, foreign and domestic, including its indebtedness to the home office.
A. Stated Capital $4,000,000 Less recovery applied against capital 391,000 $3,609,000 B. Unremitted profits 923,320 C. Unearned discount 29,025 D. Reserve for Taxes 170,448 E. Contributions to retirement and thrift incentive plans 129,372 F. Charged off loans 157,343 G. Banking Houses and real estate appreciation over book value 189,767 H. Going business value or good will 2,850,000 I. Reimbursement to personnel for personal property abandoned on closing of branches 154,929 __________ TOTAL $8,213,204 ==========
A. Capital Loan $4,000,000 Less recovery applied against capital 391,000 $3,609,000 B. Unremitted profits 923,320 C. Unearned discount 29,025 D. Reserve for Taxes 170,448 E. Contributions to retirement and thrift incentive plans 129,372 F. Charged off loans 157,343 G. Overdraft in account with home office 94,515 H. Payment of Letters of Credit by home office 667,205 _________ TOTAL $5,780,228 =========
In our consideration of the separate items, we are reminded that Chase and Citibank are both member banks of the Federal Reserve System and that Citibank is and was then a national bank. Chase
|[ 505 F.Supp. 454 ]|
was also a national bank from 1925 to 1955, and from 1965 to present. In the interim it was chartered by the State of New York.
Obligor Guaranty or Collateral H. H. Pike Trading Co. Guaranty of H. H. Pike & Co. Remington Rand de Cuba, S.A. Guaranty of Remington Rand Division of Sperry Rand Corp. General Motors Acceptance Corp. Guaranty of General Motors of South America Acceptance Corp. Pfizer Corp. Guaranty of Chas. Pfizer & Co., Inc.
Stephen P. Radics, a Certified Public Accountant, testified for plaintiff as an expert based upon his prior service rendered to regulatory authorities in the field of banking and insurance with respect to the valuation of securities. Radics testified to valuations he had made of securities carried on the books of Chase’s Havana branch. Radics seized upon what he perceived as an inconsistency in Chase’s own valuation of some of its securities. As of June 30, 1960
|[ 505 F.Supp. 456 ]|
the branch had taken a customary write-down in market value of some of its securities, carrying some of them at 80% of value, and others at 93%. Radics concluded that on the basis of the branch’s own valuation of some of its securities, others of like maturity and coupon should likewise be written down in the name of consistency. He testified, for example, that the Social and Economic Development Bonds of the Republic of Cuba, 4%, due 1956-58, payable in dollars, should have been written down by 20% since a similar issue payable in pesos had been so written down by Chase, and under local currency regulations, a resident of Cuba holding such bonds would be required to receive payment exclusively in pesos. He also criticized carrying Cuban electric bonds at cost, because “I assumed that this would be at the approximate same 93% in value as the Tribunal Bonds because they had like maturity and the interest rate was very close.” (Tr. p. 283). He reached the same conclusion as to the Marianao Aqueduct Bonds.
A further problem is presented with respect to the capital account item. Chase has proved that on the date of the taking there was an “overdraft” in its account with the home office, amounting to $94,515. Such overdrafts were a regular consequence of the bookkeeping procedures between the Cuban offices, consolidated for recordkeeping purposes at the Havana branch, and thereafter posted, as operating results of a separate economic enterprise, to the records of the home office in New York. Between 1925 and 1937 the entire working capital of the Chase Cuban operation was supplied in the form of an overdraft. From time to time since 1937 such overdrafts were cancelled out by assignment and delivery of additional allocated capital to Havana, usually in the form of bonds or other securities, but sometimes by remitting dollars. Not only from an accounting point of view but in economic reality, the creation of this overdraft and prior negative balances had the same effect as the further contribution of capital to the Havana branch. In
|[ 505 F.Supp. 457 ]|
effect, the head Cuban branch in Havana was permitted to overdraw its checking account in dollars with the main office, so that the reflection on the books of the main office in New York would be a negative balance in the Havana branch checking account. This appears from the deposition of Michael P. Esposito, Jr., taken April 10, 1974, Ex.G. There is no reason why the overdraft amount should not be treated as a part of the capital account, for our purposes indistinguishable therefrom in fact or law.
The Court will add the sum of $94,515 for the overdraft, and the further sum of $667,205
|[ 505 F.Supp. 458 ]|
for the letters of credit paid to beneficiaries after the taking to the net recovery under Item A for capital, which is accordingly fixed at $4,370,720.
|[ 505 F.Supp. 459 ]|
G. Banking House and Real Estate Appreciation. On its books (DX 12) Chase listed its real estate holdings at a depreciated cost of $110,232. The latest available appraisal of any of the branches was made on March 28, 1960 and applies only to the Havana office (DX 13). This values the premises owned by Chase at $165,090, and the necessary adjustment to bring the book value for that property to market would be $54,858. The Court regards the appraisal, which was made prior to the commencement of any litigation, as valid, and is convinced that the premises did have a value in excess of book value. There is no evidentiary basis to write up any of the other items comprising the banking house and real estate account beyond that shown on the corporate books.
H. Going Business Value, or Good Will.In its presentation Chase has used the expression “going business value.” Reference has also been made to the “good will” value of the Chase branches. These words do not necessarily have the same meaning to this Court. The going business value is that price which a knowledgeable purchaser, trading with a seller at arm’s length, neither party under any compulsion and each fully informed, will pay for the right to continue a going business, and to
|[ 505 F.Supp. 460 ]|
receive the income stream or cash flow which that business will generate for the foreseeable future. Included in that payment, however, is the transfer to the purchaser of those physical assets and capital which are essential in order to continue to operate the business in the manner in which it has been operated. Here, Chase’s financial statement contained items such as unremitted profits, which would have been repatriated had currency control conditions permitted and were not necessary to continued operations. However, most of the balance of Chase’s capital account and physical assets were necessary to be owned by any person or corporation operating the Cuban branches.
Chase also introduced a report prepared in 1974 by Thomas H. Barton and Co., Inc. a management consulting firm (the “Barton Report” DX 15). This Report calculated a going business value premium of $2.5 to $3
|[ 505 F.Supp. 461 ]|
million dollars for the branches, based on expected deposit and earnings growth. The Report estimated that the branch might have been sold in the fall of 1960 for $7.5 million. Those projections were based on the assumption that “normal business patterns” in Cuba had not been interrupted as of January 1, 1959. The Barton Report did not attempt to assess the impact of the Cuban Revolution on the branches’ value, but valued the branch as if the Revolution and succeeding events had never occurred. Actual figures for 1959 and part of 1960 show that the Barton Report’s “projections” were far removed from the reality of actual deposits of the branches.
Average Deposits Year (in millions of dollars) 1956 46.2 1957 49.1 1958 51.8 1959 42.6 1960 (part) 38.0
The use in the valuation formula of premium prices paid for branches on Staten Island, New York and in the Clinton section of Manhattan tended to reduce the multiple because New York City generally is fairly saturated with branch banks, and the banking business here is and has been highly competitive. The Virgin Islands location was favored by the availability of the due
|[ 505 F.Supp. 462 ]|
process provisions of the American Constitution. It is an area of free dollar convertibility, enjoying special tax concessions not available in the continental United States, and is without currency controls. Banking there was not threatened with political problems of the severity present in Cuba after the Revolution. The Honduras bank, selling at a 5.55% multiple, probably reflects a better political and economic environment than that available in Cuba, but not as favorable as Manhattan. Generally, the greater the risk the larger the return demanded by investors, and the more a bank can charge when it lends out its deposits.
In this valuation issue, the Court must adopt a method of determining going concern value which is justified by the evidence and reasonable under all of the circumstances. Most of the traditional techniques for computing going concern value of a business are inappropriate or unworkable here, or require the Court to assume facts, and consider future expectations present in most market valuation circumstances, but not available in this case. Past earnings of
|[ 505 F.Supp. 463 ]|
a business are usually a good basis for valuation in the manner used by Agemian, by capitalization of earnings. But the validity of any appraisal based on past earnings requires a demonstrated underlying validity for the future of both elements of such a calculation: the figure used as a multiple, and the average earnings sum itself. Neither can be justified. The invalidity of the past historical earnings prior to 1959 as bearing on future earnings is apparent from the secular change occurring in Cuba beginning with the Revolution.
Year Average Earnings 1956 $171,326.70 1957 119,208.02 1958 361,973.10 1959 492,560.02 1960 (eight months) 448,388.85
In its proceedings before the Foreign Claims Settlement Commission, Chase had argued for a “going concern value” (actually, “goodwill”) to be added to the value of the tangible assets, and “determined on the basis of one-half the sum of 5% of the average deposits during the last five years
|[ 505 F.Supp. 464 ]|
plus ten times the average net profits for the last five years.”
A. Capital, net of adjustments $4,370,720 B. Unremitted Profits 923,320 E. Contributions to Retirement and Thrift Incentive Plans 129,372 G. Banking Houses and Real Estate Appreciation Over Book Value 54,858 H. Premium or Goodwill 1,426,600 _________ TOTAL $6,904,870 =========
Plaintiff also urges that to allow set-offs, in dollars, to defendants on their counterclaims against plaintiff’s recovery in dollars, would enable a circumvention of Cuba’s currency control regulations which prohibit unlicensed conversion of pesos to dollars and the transfer of money from Cuba to the United States. Implicit in the argument is the suggestion that the duty to pay for the confiscated property arises in Cuba and may be discharged in pesos. The identical argument was rejected in Menendez v. Saks & Co.,485 F.2d 1355, 1365 (2d Cir. 1973), rev’d. on other grounds, sub nom., Alfred Dunhill of London, Inc. v. Republic of Cuba,425 U.S. 682, 96 S.Ct. 1854,
|[ 505 F.Supp. 465 ]|
48 L.Ed.2d 301 (1976), and is rejected here on the same reasoning. See also the opinion of the late Judge Bryan in the Menendez case, reported sub nom. Menendez v. Faber, Coe & Gregg, Inc.,345 F.Supp. 527, 540 (S.D.N.Y.1972). Convertibility free of unreasonably restrictive foreign exchange controls seems also to be implicit in the concept of “prompt, adequate and effective” compensation for the expropriated property of aliens. See § 190, Restatement Second, Foreign Relations Law, and discussion following that section. Here, as the court held in Menendez, fn. 12 at p. 1365 of 485 F.2d, “if the owners had been awarded pesos rather than dollars, in effect they would have recovered nothing.”
1. The value of the Cuban branches: (a) appraised on a "going concern" basis; $9,510,000.00 OR (b) appraised on a "net worth" basis $5,961,037.00 2. Post-nationalization payment of Cuban branch liabilities $ 809,641.00 3. Claims of employees to which Citibank is subrogated as assignee $ 39,491.00
The second item of damage arose under factual circumstances indistinguishable from those which occurred with respect to Chase, discussed supra, p. 456, et seq.The head office of Citibank confirmed approximately $721,000 in commercial letters of credit for the accounts of customers of the Cuban branches prior to September 16, 1960. Once the credits were confirmed, the head office was obliged to make payments to the beneficiaries of these letters of credit in dollars, and did so. The bookkeeping procedures followed by Citibank were the same as those generally used by Chase. The Cuban Government (Banco Nacional) as the owner of Citibank’s Cuban branch, became the owner of the loans payable, or money paid or to be paid in pesos, by the Cuban Citibank customers at whose request the letters of credit had been issued. This item is clearly a proper set-off for the same reasons that an identical set-off is being allowed with respect to Chase. In addition, the head office paid customers with respect to items forwarded to Cuba for collection, and in respect of money transfers executed at the instance of the Cuban branches, consisting of bills drawn by customers, or correspondent banks of Citibank, on obligors in Cuba. These instruments were in the process of presentation and collection by the Cuban branches at the time of confiscation. The Cuban Government (Banco Nacional) succeeded to the ownership and possession of these instruments after confiscation, and received the benefits of them, while Citibank paid the corresponding amounts due to the customers. On principles of quasi-contract, and for the same reasons generally applicable to the letters of credit, this item is a proper recovery. Together, the items for collection and the payments made to the beneficiaries of the letters of credit
|[ 505 F.Supp. 466 ]|
are a proper basis for set-off in the total amount of $809,641.
U.S. Treasury Bonds in registered form, which Citibank reported as stolen and obtained reissuance from the U.S. Treasury $3,000,000.00 Accrued interest on bonds at time of confiscation 38,111.00 Set-off recovered in Banco I 12,100,000.00 Private banks set-off 54,624.00 Miscellaneous home office recoveries 109,297.00 _____________ TOTAL $5,302,032.00 =============
There are good reasons to avoid adjudicating with precision at this time a sum of money representing the value of Citibank’s branches. The record in this case is of necessity both complex and incomplete. While the parties have waived any objection based thereon, nonetheless it remains true that this Court did not observe the witnesses at the trial and did not hear them testify. Data and information available in Cuba which might be beneficial to either party was not produced, due to difficulties in respect to access. Specifically, the trial record does not include the result of operations through December 30, 1960, which date is said to be the date of valuation and
|[ 505 F.Supp. 467 ]|
taking under the Cuban statute. Citibank had an operating loss in August 1960; what was the result for September and October? Were the August results decreased by unlawful conduct of the Cuban Government and perceived likelihood of takeover which chilled the value? Or, was the downturn merely the result of social change entirely lawful under principles of international law? Perhaps the operating results of the former Citibank branches after confiscation would answer this point. The Court could infer that these results are favorable to Citibank because the information is in the “control” of plaintiff, and was not produced, but to do so would be unfair and exalt theory over reality in view of the continuing restrictions on commerce with Cuba.